Alan Trench unpicks this week’s agreement between the UK and Welsh Governments on borrowing powers and Barnett convergence

October 27th, 2012

The agreement between the UK and Welsh Governments on borrowing powers and finance announced on Wednesday has been much trumpeted by the Welsh Government. In truth, it’s hard to see that it adds up to a great deal, and it raises more questions than it answers.

The press statement relating to the agreement can be found on the Wales Office’s here and the Welsh Government’s here. The Agreement itself is on HM Treasury’s website here, and the ‘technical annex’ (which considers the operation of the Barnett formula in relation to Wales) is here. My own earlier posts on these negotiations, and the Welsh Government’s approach to them, can be found here and here.

It’s worth remembering that this ‘intergovernmental’ process was adopted by choice of the Welsh Government, which sought to ensure that these issues were kept out of the remit of the Silk Commission. That of course makes the work of the Silk Commission all the harder, as matters which relate to how devolved government in Wales is funded are excluded from its remit. That was the subject of particular criticism in a Lords debate on the subject back in July. In effect, Silk can only consider half the subject. A Welsh Government official defended this to me on the ground that the issues regarding both borrowing and the block grant were now clear, thanks to the Holtham Commission, and what was left was the political matter of resolving them. Implicitly, the Welsh Government bet that it could get a better deal by negotiating them directly with the UK Government, rather than letting them form part of the remit of the cross-party Silk Commission.

The part regarding borrowing powers suggests something of a shift by the Treasury, which was talked up by Labour AMs during the Assembly debate, but this is more apparent than real. The amount the Welsh Government might be allowed to borrow is unclear, the timescale is even less clear, and the strings on the use of the new power suggest either the Welsh Government has given away a valuable negotiating point, or that it will never be able to use them.

The agreement provides that borrowing powers are to be made available to finance infrastructure projects. The powers on offer are explicitly linked to the Welsh Government having a revenue stream with which to service them. That implies a) that the Silk Commission will recommend a significant measure of tax devolution and b) that is then implemented. Carwyn Jones has already declared the Welsh Government’s opposition to significant income tax devolution (even along Calman lines), and insisted there be a referendum before such powers could be introduced.

That suggests two possibilities. Either the Welsh Government is in fact willing to abandon its extreme scepticism about income tax devolution to get borrowing powers (and has just signalled that to the UK Government, despite insisting its position is unchanged). Or, the ‘win’ of borrowing powers is in fact wholly empty, as the Welsh Government is not willing to comply with the UK Government’s conditions so it can actually use those powers.

(There’s another issue here, as devolving tax powers also implies devolving a borrowing power to help manage the revenue fluctuations that will accompany tax devolution. There is no mention of that in the agreement.)

Even if these problems are not material, there is the question of timing. There is a very limited borrowing power in section 121 of the Government of Wales Act 2006, essentially to manage fluctuations in cashflow. It only permits borrowing from the Secretary of State in any case – not from the Treasury (which legally is distinct from ‘line’ departments), not from the Public Works Loan Board, not from the markets.

There’s also a power inherited from the Welsh Development Agency, but that is also limited; it can only be used to borrow for what used to be the WDA’s functions, and borrowing must be from the Secretary of State or with his consent. Otherwise, there is no legal power for the Welsh Ministers to borrow money. A new power will need to be created – with some urgency, if those powers are to be used relatively soon as Jane Hutt suggested in the National Assembly on Wednesday afternoon. Waiting for the bill that presumably will result from the recommendations of the Silk Commission will imply considerable delay. (Getting that bill into the 2013-14 session would imply moving extraordinarily quickly, with no intergovernmental negotiations after part 2 of the Silk Commission report is published. Will that bill be in the 2014-15 session, or postponed until after the 2015 UK election?) The other obvious vehicle would be a Westminster Finance bill, which of course goes before Parliament every year, but there is no mention of using that in the statement

While the announcement on borrowing powers is thin, the part of the deal regarding the block grant is even thinner. This is not a ‘Barnett floor’ to prevent future convergence, nor any sort of agreement about applying a needs-based formula. It’s an agreement to consider an ad hoc adjustment, if at some future time there might be a question about what happens in the absence of a floor.

The agreement notes the Welsh Government’s ‘concern’ about convergence under Barnett, and the UK Government notes the concern that convergence causes for the Welsh Government. The ‘technical annex’ surveys the extent to which convergence has happened since 1999, and notes that there will be a small measure of divergence during the period 2010-11 to 2014-15. (So there should be, given the way the UK Government has sheltered spending on health and schools during the current Spending Review period; see HERE for an explanation.) What the agreement gives is an assurance that:

in future, in advance of each spending review, there will be a joint review of the pattern of convergence by the two Governments. If convergence is forecast to occur over the course of the spending review period, both Governments will then enter into discussions on options to address the issue, based on a shared understanding of all the evidence available at that time.

That may sound like a limited assurance that Wales will not be materially disadvantaged in future spending reviews, even if all it does is to build an assessment of convergence into the process and open the path to negotiations during that spending review. (There’s good reason to be sceptical about how useful that is, given the propensity of Chief Secretaries to finalise the spending review with little regard to the devolution implications of what they’re deciding; that’s where the problems with consequentials for the 2012 Olympics started, as well as the row about funding of S4C in 2010). The problem from a Welsh point of view is that it isn’t new, and on the whole it probably amounts to a more limited commitment than that given by Peter Hain in 2009:

the Government will make a full assessment of the extent of convergence with consideration of Wales’ position relative to other parts of the United Kingdom as part of each spending review; and following this assessment the Government would be prepared to take action if appropriate to ensure Wales is not disproportionately disadvantaged.

While this formulation did include the unclear and rather convoluted criterion of being ‘disproportionately disadvantaged’, it did include an assurance of action if that criterion were satisfied (my criticism of it at the time is HERE). All that the new agreement with the Treasury offers is ‘discussion on options to address the issue’ which must itself be based on ‘a shared understanding of the evidence available at the time’ (which, given the much better information available to the Treasury, offers another significant advantage to the UK Government). It does however mean that Jane Hutt’s claim that this was a ‘new commitment’ looks rather odd.

It’s unclear whether this is the end of the intergovernmental process, or merely a punctuation point. The agreement can be read both ways, saying that

Both Governments commit to negotiating to achieve a sustainable arrangement for Welsh devolved funding and the UK public finances, that each can accept as being fair and affordable.

The Welsh Government believes that a mutually acceptable outcome to those discussions is an essential precondition for any significant devolution of taxes and the UK Government will only implement such changes with the consent of the National Assembly for Wales.

That implies a good deal of further negotiation, but does not indicate when or how that is to happen: in the immediate future, or after the publication of the Silk Commission’s reports?

What all this amounts to is that the ‘grand bargain’ does not materially advance Wales’s interests, nor does it amount to the making of significant concessions by the Treasury (since there is little if anything new in what the Treasury has offered). What it does do is hamper the Welsh Government’s position in seeking to resist the devolution of some income tax powers, however. It’s hard to view that as a political success in any respect.

Alan Trench provides a commentary on devolution through his blog Devolution Matters (where this article originally appeared) and in many other publications. His name was invoked several times in this week’s Assembly debate on Wednesday on the borrowing agreement, particularly by Ieuan Wyn Jones who asked Jane Hutt “Minister, why have you allowed Alan Trench to be proved right?”

One Response to:“Assembly finance deal kicks can down road”

Oct

28

1:31 am

Tredwyn says:

This demonstrates again that Wales has no bargaining powers and cannot negotiate anything which the UK government or Treasury regards as even mildly disadvantageous to them, whatever the merits of the case. The mystery is why the Welsh government pretends to have achieved anything instead of denouncing westminster intransigence and calling on the Welsh Tories and LibDems to revolt against their government’s indifference to Wales. At the end of the day the Welsh have to put away the begging bowl and act to strengthen their own economy.